When a lender decides to foreclose on a property, a notice of default or a lis pendens (Latin for “lawsuit pending") is filed, depending on the state. This document is a public record, and for buyers, it's the first step in locating a property in foreclosure. A buyer looking for foreclosures also can buy magazines and newsletters that list properties in default.
Once a home has been located, search public records. Look for liens on the property, since they can drive up the purchase price. Liens typically are placed on a house for unpaid property taxes. Also check assessed values and sale prices of neighboring properties.
Research local state foreclosure laws, since they differ. Some states - such as Florida, New York, Ohio and Pennsylvania - require the lender to sue the borrower and get a court order for the sale of the property, a process known as judicial foreclosure. Other states - including California and Texas - follow the non-judicial foreclosure process, which doesn't require a lawsuit.
For novice investors, buying from the lender is the safest way to buy. Most foreclosures are taken back by the bank during auction. While well-located homes in good shape generally don't sell for deep discounts, rundown properties can be sold more cheaply.
Often, the banks hire a real estate agent and sell foreclosed homes in the traditional manner. But sometimes buyers can succeed by pestering bank loan officers with low offers. Buyers might try low-balling the lender's REO (for “real estate owned") officer shortly before the nonperforming assets have to be reported to supervisors.
The safest deals
Bank-owned properties offer the safest deal for inexperienced foreclosure buyers. There's no risk. There are no taxes, no liens, no tenants to evict.
A lender that's eager to sell might be willing to offer attractive terms. The lender might offer to finance the property at a below-market rate or with a lower-than-usual down payment. Because the bank already has done an appraisal, the buyer might not have to pay an appraisal fee. Lender deals typically include title insurance, which removes much of the risk that accompanies buying homes earlier in the foreclosure process.
Not all foreclosures are previously owned homes. Some foreclosed homes are new. These homes are not as easy to identify and rarely appear on national lists. In some areas, the slow economy has left many builders of new midscale and upscale homes at the end of their construction-loan periods without finding buyers for their homes. In these cases, the banks that issued the construction loans take possession of the homes and attempt to sell them, using real-estate agents to handle the deals.
These, too, are foreclosures. They are “hidden" foreclosures because no one associated with the sale of these properties will refer to them as foreclosed homes.
More daring investors can find other points in the process to buy homes, like just before foreclosure. The buyer finds a homeowner about to go into default. The homeowner doesn't want to lose all of the equity in the property, so accepts a portion of the difference between the equity and the home's market value. Pre-foreclosure buys offer bargains but demand persistence. That's because creditors are often hounding owners at this stage. If the homeowner is contacted, the buyer could be in for a surprise. Homeowners in default might not have phones or electricity, and they might have a variety of personal and legal problems. What's more, they probably need somewhere to live before they can move out of the property the buyer wants. This is a high-risk, high-reward proposition, and it's not for first-time foreclosure buyers. If you are looking for foreclosures in Howell, Michigan , the expert staff at Century 21 Lady of the Lakes can answer all of your questions.
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